Cramer: Trading the Final Five Days of 2010

Cramer on Thursday laid out his “Game Plan” for the last week of 2010. While there’s virtually no tradable data on the way, there is some history in these five days that gives investors an idea of what to expect.

Game Plan

Mad Money host Jim Cramer has a game plan to make you some mad $$$.

After looking at the last 20 years on Wall Street, Cramer found that 10 of them saw gains of 10 percent or more. And in the final week of those 10 years, the market added 1.3 percent. So with the S&P 500 up 12.7 percent for 2010, can we expect a similar trend to play out? Cramer thinks so.

Sure, 2009 saw an annual gain of 23.5 percent and then lost 0.5 percent during the last week of the year. But that’s only the second year aside of 1996 when the market was up double digits and then lost ground between Christmas and New Year’s.

Even during the less-than-stellar years, stocks still seemed to hold up for the final five days, with the worst of the weeks dropping more than 1 percent only twice: once in 2006, when the market pulled back 1.1 percent despite a 3-percent bump for the year; and in 2002, when a disastrous 23-percent decline ended with a 2-percent dip during the last week.

So where does this consistency come from? And can investors rely on it this year?

Well, money managers who’ve had a good 12 months aren’t about to let someone else mess it up at the end. So they will put their cash to work, bidding for stocks just under the share price. This creates a floor of sorts that prevents big sellers from breaking through. The defense can be so powerful, Cramer said, that the shorts unload their positions lightly so as to prevent the counter-buying from cutting into their profits.

Another reason this trend plays out every year is because of the relationship between analysts and mutual funds. It’s a symbiotic one where analysts tend to hold back any significant downgrades until the New Year so they don't hurt the annual performance of mutual funds. Cramer pointed to the downgrade last week of American Express by Stifel Nicolaus as an example of how this relationship can go wrong. Plenty of money managers were angry at the downgrade, he said, enough to threaten pulling some of their business from Stifel. That's why Cramer doubts that any other analysts will make the same mistake as the year comes to a close.

Lastly, the companies themselves go quiet at year end, and for much the same reason that analysts won’t upset mutual funds—they, along with hedge funds, are clients. These funds own huge pieces of companies, and the companies don’t want to risk hurting the funds’ performance. So any bad news will most likely wait until after Jan. 1.

“Put it all together,” Cramer said, “and you have a recipe for positive activity in the last week of the year.”

He thinks we’ll see “benign to positive” action for those last five days.